During an investor presentation in New York later that day, Gundlach said that there’s a “weird argument” that U.S. bonds are “wickedly attractive” relative to European and Japanese bonds, which boast much lower yields.

“Wrong. Wrong. Wrong. It couldn’t be more wrong,” Gundlach said, adding, “Our bonds are not attractive.”

While the nominal yield is higher, foreign buyers have to hedge the currency, which is “very expensive,” he added.

“Don’t expect foreigners to be clamoring into the bond market unless the hedge costs radically change,” he later said.

Beware China

The critical question for the bond market is, “Who is the big buyer?”

In response to a question from a reporter, Gundlach acknowledged that China is a major purchaser of U.S. debt, but they may decide not to continue doing that.

“China has been a voracious buyer of U.S. debt. And you may not know this, but our president is saber rattling on trade wars with China, which might motivate them to buy less, I don’t know if they will. But, if I were president for life of China, I would probably be like, ‘I’m not incrementally motivated to buy your debt.’”

During his talk, Gundlach noted that the 10-year note broke the downtrend “two long years ago.” DoubleLine turned “maximum negative” on the 10-year on July 6, 2016 around the time the low yield of 1.32% was touched. Gundlach has remained in a “bearish posture” on rates since then.

It’s a “terrible time” to be selling bonds

If the 10-year breaks above 3% decisively and has a couple of closes above that level, there’s “nothing but air” above the yield level until it approaches 3.5% or 4%.

“If the 10-year was a great short at 2.99% then it was a great short at 3.6%. Let the market do the talking,” he said.